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The government has decided that the freemarket price of cheese is too low. a. Suppose
Chapter 6, Problem Problems and Applications 6.2(choose chapter or problem)
The government has decided that the freemarket price of cheese is too low. a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese? b. Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain. c. In response to farmers complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?
Questions & Answers
QUESTION:
The government has decided that the freemarket price of cheese is too low. a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese? b. Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain. c. In response to farmers complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?
ANSWER:Step 1 of 4
Price floors in an economy are often imposed by the government on very specific products to protect the producers of those products from incurring losses due to continued declines in prices. The price floors are intentionally set at that price which tends to remain above the equilibrium price.